Notice, December 1996

Bowing to Managed Care, Regents Approve
Merger of UCSF, Stanford Medical Centers

The UC Regents in November took the watershed step of approving a corporation that will govern merged operations of the UC San Francisco and Stanford University medical centers.

The Regents decided that, barring unforeseen circumstances, a single nonprofit corporation, UCSF Stanford Health Care, will manage the joint operations of four UCSF and Stanford hospitals and their related facilities as of July 1997. The action came nine days after UCSF Chancellor Joseph Martin announced he would be leaving UC to become dean of the medical faculty at Harvard University. The key role Martin has played in the merger negotiations thus far gave at least one Regent, Roy Brophy, second thoughts about proceeding without him, but in the end the Regents' votes on the merger were not even close: the final full-board vote on the issue was 14-2 in favor.

The stakes involved in the decision were apparent to everyone. The seismic shifts in the U.S. health-care industry have put the once mighty Stanford and UCSF medical centers in a precarious financial position. One study has estimated that operating margins of 5 to 7 percent are necessary to finance capital improvements at teaching hospitals such as UC's; UCSF's operating margin for the 1995-96 fiscal year was less than 1 percent.

So concerned were the Regents about the proposed merger, however, that, after receiving positive recommendations on it from UC administrators, they commissioned an independent, third-party review of the proposal from a group headed by Warren Hellman, a San Francisco investment banker. Reporting on November 8, Hellman gave his group's bottom-line forecast: Without the merger, the UCSF medical center can expect an operating loss of 3.4 percent by the year 2000; with the merger, it can expect an operating gain of 3.9 percent.

Much was made of what the Hellman group did, and did not, include as part of UCSF's revenues, but the Regents apparently were persuaded by Hellman that the merger made sense as a business decision. Compared to separate UCSF and Stanford institutions, the Regents were told, the merged entity (UCSHC) will make money by providing more patients with more treatment options over a broader geographical area, and by cutting equipment and operating expenses, thus lowering prices for specialty care.

If the central question for UC was the continued financial viability of the medical enterprise at UCSF, the subsidiary questions related to the merger seemed hardly less weighty. How will UCSF's research and teaching be affected by the action? What about treatment of indigent patients? What happens to the pensions of long-time UCSF employees? Organized labor is disturbed enough about the action that it has gone to court over it, though UC attorneys expressed confidence that the action would withstand legal challenge.

Faculty leaders at UCSF say faculty sentiment regarding the merger generally seems to be one of hopefulness about the future tinged with a good deal of apprehension regarding teaching, research and the funding that comes through clinical departments.

"I think the support for the merger is overwhelming among the faculty, though I have been challenged when I've used that adjective," says UCSF Academic Senate Chair William Wara. "I see this as a great opportunity to reorganize and to establish collaborative efforts in research and education between the two entities."

UCSF Professor of Pharmacy Svein Oie, who is heading up a UCSF Senate task force on the merger, says faculty concerns about teaching and research stem broadly from two considerations: UCSHC's governance structure and its focus on profitability.

"Currently the hospital director reports to the chancellor and as such is sensitive to faculty concerns," says Oie. Conversely, at UCSHC, he notes, "the reporting relationship will be to an independent board." Currently, most UCSF faculty doing research in the clinical setting are granted access to medical center equipment (at a charge) and to UCSF patients, once approval is secured from a human experimentation committee. Will such access be routinely granted in an independent, business-oriented facility?

Regarding education, he says, "there is a fear that the concern for business will outweigh the willingness to take on students -- in opening a clinic, for example." He says that the UCSF administration is taking these kinds of concerns seriously and that he has no reason to believe things will work out badly with the merger. "We know what we've got," he says, "but we don't know what we're getting. There's a reluctance to move into the unknown."

As it turns out, faculty will have a voice on the UCSHC board, which will be composed of 17 members: six from UC, six from Stanford and five from outside . UC's representatives will be the president and two other regents, along with UCSF's chancellor, the dean of its medical school and one faculty member from the school. Academic Council Chair Duncan Mellichamp told the Regents in November that it's important that the procedure for choosing the faculty board member lead to selection of someone who can independently represent the UCSF Senate's views on teaching and research.